David Seymour says the IRD is "taking advantage of taxpayers" after it was revealed it took too much tax off almost one million New Zealanders.
Hundreds of thousands of people are currently on the wrong prescribed investor tax rate (PIR), resulting in the overpaying of tax on investments like KiwiSaver.
However they won't get their money back because the IRD says "current legislation" doesn't allow for it.
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"This is one of many problems created by a tax system in which income is taxed at multiple rates. It creates complexity and confusion for taxpayers and requires an army of bureaucrats in order to check people are being taxed at the correct rate," the ACT Party leader told Newshub.
"Right now the IRD seeks to recover unpaid tax but won't refund overpayments. The more complex the law, the more the IRD takes advantage of taxpayers."
National Party revenue spokesman Andrew Bayly says Revenue Minister Stuart Nash should amend the law so overpayers could claim refunds for the 2018-19 tax year.
"If you are going to make people pay from 2018-19, refunds should apply from the same date," he told Stuff.
"There is no excuse not to do it. If you are going to take from one and not give back to the other that is totally unfair."
Seymour is calling for a flat tax to simplify the tax system and reduce errors.
"ACT's Freedom to Earn tax policy would mean one rate of income tax rate of 17.5 percent and zero confusion. It wouldn't matter who a person was or how their income was earned, the same low rate of tax would apply," he says.
"One rate of tax would reduce the power imbalance between the IRD and the taxpayer.
"As a country, we face a simple choice with regard to tax policy. We can either have an administratively complex and often unfair system that punishes success, or the world's simplest, most success-orientated system."